U.S. banks are ignoring Europe’s lesson on greed

Guest
Column:William D. Cohan

Four years after the collapse of Lehman Brothers Holdings Inc. and the near-total paralysis of capitalism’s central nervous system – the moment fear completely overwhelmed greed on Wall Street – we are starting to see a few glimmers of hope.

U.S. banks are ignoring Europe’s lesson on greed

Posted:
Saturday, September 22, 2012 12:05 am

Guest
Column:William D. Cohan

Four years after the collapse of Lehman Brothers Holdings Inc. and the near-total paralysis of capitalism’s central nervous system – the moment fear completely overwhelmed greed on Wall Street – we are starting to see a few glimmers of hope.

The good news: Several big banks have finally started taking steps to reform Wall Street’s out-of-control compensation system, which rewards bankers and traders with big bonuses for taking insane risks with other people’s money. The bad news: These banks are in Europe, and most of their U.S. cousins still just don’t get it.

In recent days, both Deutsche Bank AG and UBS AG announced plans to change their compensation systems. Deutsche Bank said that the portion of the pay its top 150 managing directors receive in the form of deferred stock would vest after five years, instead of three, which should concentrate their minds for a bit longer. The bank also appointed an outside committee to examine its pay practices generally, and pledged to be at the forefront of change in the industry. While not yet the sort of extensive transformation that will protect the rest of us from bankers’ bad behavior, the Deutsche Bank proposals at least prove the old saw that in the land of the blind, the one-eyed man remains king.

UBS, for its part, said it is considering capping banker and trader bonuses and making them a function of the executives’ fixed salaries or of the bank’s profitability.

In the U.S., though, there has been virtual silence on the topic. Bankers and traders on Wall Street still get rewarded with big bonuses solely based upon the revenue they generate from the products they sell. As for accountability, forget it.

Worse, neither Lloyd Blankfein, the chief executive officer of Goldman Sachs Group Inc., or Jamie Dimon, his counterpart at JPMorgan Chase & Co. – Wall Street’s highest-profile leaders – have said anything about changing this flawed system, while continuing to be paid tens of millions in annual compensation. Instead, Goldman cut corners by eliminating its two-year analyst program for college seniors. This is not leadership.

To his credit, James Gorman, the CEO of Morgan Stanley, has at least addressed the flawed Wall Street compensation system: In 2011, Morgan Stanley’s bankers and traders had their cash bonuses capped at $125,000. Gorman said publicly, at the World Economic Forum in January, if they didn’t like it, they could just leave.

And just as the basic compensation structure on Wall Street remains for the most part unchanged, so too does its behavior, despite the passage of the Dodd-Frank law and the ceaseless writing and rewriting of the new regulations it mandated.

Wall Street behavior merely reflects the latest acceptable norms in society as a whole, which sadly has seen a steady decline in ethics, morality, compliance and leadership in the last generation.

Wall Street has taught Main Street the wonders of stock options and “golden parachutes” and excessive executive compensation, among other things, all of which are designed to enrich the few at the top with a minimal amount of accountability for their behavior.

We have also been inundated in the last year with the facts of just how easy it is for private-equity and hedge-fund moguls to make fortunes using other people’s money while minimizing the amount of taxes they pay.

If the financial crisis and its aftermath have taught us anything, though, it is that greed is not always good. Not even close. •

Get the most up-to-date data on the Rhode Island and southern Massachusetts business community from the PBN List Center. Download and purchase PBN Lists as well as the complete Book of Lists in Excel format.